Head of US Minneapolis CB: Fed must not cut rates now

By Al Mayadeen English
Source: Agencies
4 Jan 20:37
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Head of the Central Bank of Minneapolis Neel Kashkari says that the US must be confident that inflation has peaked before stopping rate hikes.

Image of the Federal Reserve. (Reuters)

In an essay published on Wednesday by The Wall Street Journal, the head of the central bank in Minneapolis, Neel Kashkari, said that interest rates in the US should be raised around 1% more to accomplish the Federal Reserve’s target to fight inflation.

"While I believe it is too soon to definitively declare that inflation has peaked, we are seeing increasing evidence that it may have," Kashkari said.

According to the Consumer Price Index (CPI) measurement, inflation increased by 7.7% in a year until October of 2022, rising at its slowest rate in nine months after topping a forty-year high of 9.1% in a year until June of 2022.

The lowered inflation levels came following consecutive rate increases by the Federal Reserve last year, raising the rate by 4.25% between March and December of last year.

Before these hikes, rates reached a high of 0.25% as the United States central bank cut them down to almost zero following the COVID-19 pandemic in 2020.

Despite the Fed's efforts, however, the inflation rate continues to be three times higher than the favored level of 2% per year.

"It is appropriate to continue interest rate hikes at least at the next few meetings until we are confident that inflation has peaked," Kashkari stated, in a reference to the Federal Open Market Committee (FOMC) meetings of the Federal Reserve that makes the decisions regarding the interest rates.

"The Fed must avoid cutting rates prematurely and causing inflation to spike again, as this would be a costly mistake."

In case the inflation has actually peaked, economists expect the Fed to raise rates by only 0.25% during the coming FOMC meeting in February, unlike previous hikes of 0.75% decided between June and November of 2022.

Kashkari warned that rates might go over 5.4%. However, this will depend on how effective are the attempts to lower inflation.

"In this stage, any indication of slow progress in lowering inflation will necessitate raising policy rates potentially significantly," he stressed, noting that the Fed would only consider cutting the rates if the inflation rate starts approaching 2%.